University of Winnipeg
Department of Business and Administration
Term Test
DATE: Wednesday, February 10, 2009
TIME: 4:00 pm to 6:00 pm
COURSE TITLE: Advanced Financial Accounting
#: BUS-4002/3
SECTION: 001
INSTRUCTOR: Michael Weedon
NUMBER OF PAGES: 9
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Problems
1. Telecom Inc has decided to purchase the shares of Intron Inc. for $300, 000 in Cash on
July 1, 2002. On the date, the balance sheets of each of these companies were as follows:
Cash and Short-Term Securities
Inventory
Plant and Equipment (net)
Total Assets
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
Total Liabilities and Equity
Telecom Inc
$920,000
$150,000
$330,000
$1,400,000
$420,000
$700,000
$180,000
$100,000
$1,400,000
Intron Inc
$200,000
$20,000
$180,000
$400,000
$90,000
$200,000
$60,000
$50,000
$400,000
On that date, the fair values of Intron’s Assets and Liabilities were as follows:
Cash/Short-Term Securities
Inventory
Plant and Equipment (net)
Current Liabilities
Bonds Payable
$200,000
$15,000
$250,000
$90,000
$210,000
A) Based on the information provided, answer the following:
a. Prepare the journal entry to record the purchases Intron’s shares.
b. Prepare the required journal entry prior to the preparation of the Consolidated Financial
Statements.
Solution:
a. Investment in Intron Inc.
Cash
$300,000
$300,000
1
b. Cash & Short-Term Securities
Inventory
Plant & Equipment (net)
Current Liabilities
Bonds Payable
Goodwill
Investment in Intron Inc.
$200,000
$15,000
$250,000
$90,000
$210,000
$135,000
$300,000.
B) Assume that two days after the acquisition, the Goodwill was put to an impairment test,
after which it was decided that its true value should have been $70,000.
Required:
Prepare the necessary journal entry to write-down the goodwill as well as another
Consolidated Balance Sheet to reflect the new Goodwill amount.
Solution:
Journal Entry:
Retained Earnings
Goodwill
$65,000
$65,000
Telecom Inc,
Consolidated Balance Sheet as at July 3rd, 2002
ASSETS:
Cash & Short-Term Securities
$820,000
Inventory
$165,000
Plant & Equipment (net)
$580,000
Goodwill
$70,000
Total Assets:
$1,635,000
LIABILITIES:
Current Liabilities
$ 510,000
Bonds Payable
$ 910,000
Total Liabilities
$1,420,000
Shareholder Equity:
Common Shares
$180,000
Retained Earnings
$ 35,000
Total Shareholder Equity
$215,000
Total Liabilities
& Shareholder Equity
$1,635,000
2
2. Keen and Lax Inc had the following balance sheets on October 31, 2002:
Keen Inc
Lax Inc
Fair Value
Cash
Accounts Receivable
Inventory
Plant and Equipment (net)
Trademark
$300,000
$60,000
$30,000
$310,000
-
$80,000
$24,000
$54,000
$280,000
$12,000
$80,000
$24,000
$50,000
$300,000
$16,000
Total Assets
$700,000
$450,000
Accounts Payable
Bonds Payable
Common Shares
Retained Earnings
$150,000
$400,000
$100,000
$50,000
$200,000
$120,000
$60,000
$70,000
$700,000
$450,000
Total Liabilities and Equity
$200,000
$100,000
Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the
Consolidated Balance Sheet on the Date of Acquisition.
Solution:
Keen Inc
Consolidated Balance Sheet,
as at October 31, 2002
Cash
Accounts Receivable
Inventory
Plant and Equipment (net)
Trademark
Goodwill
$140,000
$ 84,000
$ 80,000
$610,000
$ 16,000
$130,000
Total Assets
$1,060,000
Accounts Payable
Bonds Payable
Total Liabilities
$350,000
$500,000
$850,000
Non-Controlling Interest
Common Shares
Retained Earnings
Shareholder Equity
$ 60,000
$100,000
$ 50,000
$210,000
Total Liabilities and Equity
$1,060,000
3
3. Brand X Inc. purchased a controlling interest in Brand Y Inc. for $200,000 on January 1,
2001. On that date, Brand Y Inc had Common Stock and Retained Earnings worth
$180,000 and $20,000, respectively. Goodwill is tested annually for impairment. The
Balance Sheets of Both Companies, as well as Brand Y’s Fair Market Values on the date
of acquisition are disclosed below:
Brand X Inc
Brand Y Inc Fair Value
Cash
Accounts Receivable
Inventory
Equipment (net)
Patent
Investment in Brand Y
$200,000
$100,000
$ 80,000
$220,000
$350,000
$45,000
$40,000
$55,000
$100,000
$ 60,000
Total Assets
$950,000
$300,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$480,000
$270,000
$100,000
$100,000
$ 50,000
$ 50,000
$180,000
$ 20,000
$950,000
$300,000
Total Liabilities and Equity
$45,000
$40,000
$50,000
$70,000
$84,000
$50,000
$45,000
The net incomes for Brand X and Brand Y for the year ended December 31, 2001 were $1,000
$48,000 respectively. An impairment test conducted on December 31, 2001 revealed that the
Goodwill should actually have a value $2,000 lower than the amount computed on the date of
acquisition. Both companies use a FIFO system, and Brand Y’s inventory on the date of
acquisition was sold during the year. Brand X did not declare any dividends during the year.
However, Brand Y paid $51,000 in Dividends to make up for several years in which the company
had never paid any dividends. Brand Y’s Equipment and Patent have useful lives of 10 years and
6 years respectively from the date of acquisition. All Bonds Payable mature on January 1, 2006.
Prepare Brand X’s Consolidated Balance Sheet as at December 31, 2001, assuming that Brand X
purchased 100% of Brand Y for $350,000.
Solution:
Brand X Inc
Consolidated Balance Sheet,
As at December 31, 2001
4
Cash
Accounts Receivable
Inventory
Equipment (net)
Patent
Goodwill
$245,000
$140,000
$135,000 (80+55+5-5)
$293,000 (220+100-30+3)
$ 80,000 (60+24-4)
$154,000 * see below.
Total Assets
$1,047,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$530,000
$316,000 (270+50-5+1)
$100,000
$101,000
Total Liabilities and Equity
$1,047,000
The following explanation may help students understand how some of these figures were
derived:
Goodwill:
Purchase Price
Less:
Fair Value of Net Assets Acquired:
$350,000
Goodwill
Less: Impairment Loss
$156,000
($2,000)
Goodwill
$154,000
$194,000
Consolidated Retained Earnings:
Brand X Retained Earnings, January 1, 2001:
$100,000
Add :
Brand X Net Income
$1,000
Less: Dividends
n/a
Consolidated Retained Earnings
$101,000
Note: Consolidated Net Income under the Equity Method would be Brand X’s net income.
5
4. NOOK Inc purchased 70% of the outstanding voting shares STAR Inc. for $300,000 on
March 1, 2002. On that date, STAR Inc had Common Stock and Retained Earnings worth
$80,000 and $90,000, respectively. Goodwill is tested annually for impairment. The
Balance Sheets of both Companies, as well as STAR’s Fair Market Values on the date of
acquisition are disclosed below:
NOOK Inc
STAR Inc
Fair Value
Cash
Accounts Receivable
Inventory
Investment in STAR Inc.
Equipment (net)
Patent
$450,000
$ 50,000
$ 50,000
$300,000
$150,000
$30,000
$48,000
$67,000
$30,000
$48,000
$77,000
$90,000
$75,000
$70,000
$90,000
Total Assets
$1,000,000
$310,000
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$650,000
$200,000
$80,000
$70,000
$
$
$
$
$1,000,000
$310,000
Total Liabilities and Equity
80,000
60,000
80,000
90,000
$80,000
$70,000
The combined Statements of Income and Retained Earnings for the last fiscal year, which ended
on February 28, 2003, are shown below: NOOK’s Dividend Income was received entirely from
STAR.
NOOK Inc.
STAR Inc.
Sales
Dividend Income
$200,000
$ 42,000
$120,000
Less: Cost of Sales
Less: Other Expenses
$120,000
$ 30,000
$80,000
$20,000
Net Income:
Retained Earnings (Beginning)
Less: Dividends
$92,000
$70,000
($12,000)
$20,000
$90,000
($60,000)
Retained Earnings
$150,000
$50,000
The Balance Sheets of both companies as at February 28, 2003 are shown below:
Cash
Accounts Receivable
NOOK Inc
STAR Inc
$400,000
$ 50,000
$20,000
$50,000
6
Inventory
Investment in STAR Inc.
Equipment (net)
Patent
$ 30,000
$300,000
$150,000
$60,000
Total Assets
$930,000
$277,500
Current Liabilities
Bonds Payable
Common Shares
Retained Earnings
$500,000
$200,000
$ 80,000
$150,000
$
$
$
$
$930,000
$277,500
Total Liabilities and Equity
$80,000
$67,500
87,500
60,000
80,000
50,000
Both companies use a FIFO system, and STAR’s inventory on the date of acquisition was sold
during the year. STAR’s Equipment had a remaining useful life of 5 years from the date of
acquisition. STAR’s Patent was estimated to have a remaining useful life of 10 years. STAR’s
Bonds mature exactly 10 years after the acquisition date. A Goodwill Impairment test conducted
during January of 2003 revealed that NOOK’s Goodwill amount at acquisition was
overestimated by $1,000.
NOOK Inc. uses the Cost Method to account for its Investment in STAR Inc.
A) Calculate the amount of Goodwill as at the date of acquisition. What would be the
amount of Goodwill appearing on Nook’ Consolidated Balance Sheet one year after the
date of acquisition?
Solution:
Impute Purchase Price (100% of assets)
$300,000/0.7
Less: Fair Value of Net Assets Acquired:
(100%)
= $428,571
($165,000)
Goodwill
$263,571
Due to the impairment loss during the year, Consolidated Goodwill would be $262,571 one year
after the acquisition date.
B) Calculate Nook’s Consolidated Net Income for the Year.
Solution:
Nook’s Net Income
Star’s Net Income (70%)
$92,000
$14,000
Add (Deduct):
7
Dividends paid To Nook
Goodwill Impairment Loss
Inventory Fair Value amortization
Equipment Fair Value Amortization
Patent Fair Value Amortization
Bonds Payable Fair Value Amortization
($42,000)
($1,000)
($7,000)
$2,800
($1,050)
$700
Consolidated Net Income
$58,450
C) Calculate Nook’s Consolidated Retained Earnings for the Year.
Solution:
Beginning Retained Earnings
Consolidated Net Income
Less: Nook’s Dividends
$70,000
$58,450
($12,000)
Consolidated Retained Earnings
$116,450
D) Prepare a Statement of Changes in Non-Controlling Interest for the Year:
Solution:
Non-Controlling Interest at Acquisition:
$128,571
Add (Deduct):
Star’s Net Income
Dividends Declared by Star
Inventory Fair Value amortization
Equipment Fair Value Amortization
Patent Fair Value Amortization
Bonds Payable Fair Value Amortization
Subtotal
$ 20,000
($60,000)
($10,000)
$4,000
($1,500)
$1,000
($46,500)
Non-Controlling Interest
*30%
Non-Controlling Interest (30%)
E)
($13,950)
$114,621
Prepare Nook’s Consolidated Balance Sheet as at February 28, 2003.
Solution:
Nook Inc.
Consolidated Balance Sheet as at
February 28, 2003
Cash
Accounts Receivable
Inventory
$420,000
$100,000
$ 90,000
8
Equipment (net)
Patent
Goodwill
$214,000
$ 81,000
$262,571
Total Assets
$1,167,571
Current Liabilities
Bonds Payable
Non-Controlling Interest
Common Shares
Retained Earnings
$587,500
$269,000
$114,621
$ 80,000
$116,450
Total Liabilities and Equity
$1,167,571
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